Europe’s Emissions Trading Scheme, trading in carbon permits are all but dead

Up to now Europe has promoted the idea that the trading of permits to emit carbon is the best way to cap greenhouse gas emissions by aircraft and maritime transport. However, not only is the European scheme coming to be seen as of questionable viability, but its extra-territoriality is being challenged by many governments.

As a part of Europe’s global approach to showing the way, it introduced in 2005 an Emissions Trading Scheme. This involves companies having to pay for their emissions above a set level by purchasing credits on the carbon market. The idea is that by charging companies to emit carbon, such enterprises will gradually introduce efficiencies and reduce emissions. Firms that need to increase their emissions must buy permits to emit more on the carbon market from those who require fewer. What the scheme does is introduce a market-based approach limiting total emissions with the buyer paying a charge for polluting, while the seller is rewarded for having reduced their emissions.

However, something has happened that the intellectual architects of the scheme did not foresee. There has been since 2008 a dramatic fall in carbon emissions as the global recession has taken hold. At the same time there has been a parallel success in improving energy efficiency. Together these two factors have had the effect of pushing the carbon price to an all time low. The result is that on the carbon market prices have fallen by 75 per cent and Europe’s Emissions Trading Scheme (EU ETS) and trading in carbon permits are both all but dead, leaving little justification to invest in cleaner technology.

The consequence has been that Europe is now set on intervention, and controversially the European Commission is considering ‘managing’ the carbon market by setting aside very large numbers of permits (perhaps as many as 1.3 billion) in an attempt to stabilise and strengthen prices.

Europe had hoped that by demonstrating that the market could act as a brake on emissions and encourage less polluting approaches, it could encourage other nations, including major emitters such as China, that there was a viable market-led model that might eventually be linked to any global agreement on climate change. This has an important long-term consequence for the Caribbean as one of the few regions which might eventually hope, as a low or zero carbon emitter, to be the net recipient of tradable carbon credits and resource transfers under any global scheme.

A second development relates to aviation. As has been widely reported, Europe included in its EU ETS all civil aviation movements into and out of its airspace from the start of this year. However, there has been a substantial backlash from many non-European carriers and their parent nations who regard the measure as illegal, extraterritorial and commercially damaging. So much so that in the last few days China has introduced a regulation banning its airlines from buying licences without prior authorisation. Russia has suggested that it will consider limiting EU airlines’ use of routes over Siberia and favour instead carriers from Japan, China and elsewhere. Another twenty or so nations that are members of the International Civil Aviation Organization (ICAO), a UN body, have agreed that they will introduce a range of other measures from imposing new taxes on EU airlines to suspending talks on improving or granting new route rights to EU airlines.

In response Europe has said that countries with aviation emissions reductions equivalent to those in the EU could be exempted from the EU ETS, but there was still a need for an international agreement at ICAO.

A much less reported development has taken place in relation to maritime transport. As has been the case with ICAO, the International Maritime Organisation (IMO) – also a UN agency – has been very slow in agreeing a system to limit maritime emissions, despite the fact that shipping produces 1.5 per cent of all greenhouse gas emissions. Although forty-eight nations voted last year in favour of adopting a mandatory energy efficiency approach for new ships and a voluntary energy management scheme for all other vessels, the world’s major shipping associations suggest that for economic reasons such measures would be damaging at this time.

They also oppose an emissions trading scheme on the basis that it would be unworkable for the shipping industry and the IMO is also expected to postpone any decision on other market-based mechanisms until the impacts on developing countries are better understood. However, the European Commission has said that if the IMO cannot agree, then it would unilaterally bring all maritime transport into its emissions trading system. With this in mind, the EC recently initiated a public consultation on four alternative approaches: a compensation fund; an emissions trading system; a fuel or carbon tax; and a mandatory system to reduce each ships emissions.

All of this has both short and long-term implications for the Caribbean. Regional airlines have already made clear that they oppose unilateral measures by Europe on carbon emissions. At present only Cubana and soon, Caribbean Airlines fly to Europe and are directly affected, but their respective governments will have to decide what if any retaliatory measures they will take.

Beyond this, Europe’s approach raises other longer term questions.

What emerges from all of this is the need to go beyond the creation of a binding multilateral agreement on climate change. It suggests that what is required is a global mechanism that enables transfers from all carbon emitting countries to carbon neutral and most at risk nations in regions like the Caribbean. It argues for regions like the Caribbean to become more actively involved in the creation of an equitable system that is well founded, sustainable and of material benefit those whose livelihoods are most at risk from sea level change.